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Leveraging Nigeria’s Comparative Advantage

Volker Treichel's picture

With a view to assessing the practical implications of the Growth Identification and Facilitation framework (GIFF) (*for more on this, see the bottom of this post) in a concrete country case, Justin Yifu Lin and I are preparing a draft paper applying the framework to Nigeria. The paper (which is expected to be published shortly) identifies as appropriate comparator countries for Nigeria: China, Vietnam, India and Indonesia. The key sectors that are identified by the paper are TV receivers, motorcycles and motor vehicle parts, fertilizers, tires, vegetable oil, meat, meat products and poultry, leather, palm oil and rice, telecommunications, wholesale and retail and construction. Our key recommendation for Nigeria is to address power shortages in a targeted manner through Independent Power Plants located in industrial zones, as well as create other enabling conditions, e.g. through subsidized access to finance and promotion of research and development (agriculture). In the area of trade policy, the government could pre-commit to reducing tariffs over a period of years and at the same time to creating a set of enabling conditions that would obviate the need for tariff protection. That way, significant incentives would be in place for the private sector to lobby the relevant government agencies to keep up their commitment to addressing these constraints. Before finalizing the paper, I visited Nigeria to meet with a range of industries that had been identified by the paper as possible target sectors and better understanding their business prospects and constraints, as well as meet with senior government officials to gauge their reaction to the proposed framework.

In Lagos, I met with representatives of companies involved in the assembly of motorcycles, TV sets and computers, production of tires, agro-processing, aluminum and cast iron manufacturing as well as the construction sector—sectors that had experienced declining export shares in countries such as China, India and Indonesia that have somewhat higher per capita GDP than Nigeria and a similar factor endowment to Nigeria.  The meetings were facilitated by the Manufacturing Association of Nigeria which holds considerable influence in Nigeria and also attended some of the meetings. 

The vast majority of private sector representatives reported strong growth rates and high profitability in recent years and expressed optimism on prospects for further growth in Nigeria. There have also been a number of cases of successful self-discovery, e.g. the production of suitcases and the assembly of TV (which started just 6 months ago).  Industries showed great disparity on the most important constraints affecting their growth prospects (e.g. access to finance; skills constraints; customs and trade facilitation issues; quality control by Standards Organization of Nigeria and unavailability of land). However, the most frequently mentioned point was the need for continued protection from cheaper imports, particularly China, given Nigeria's large cost differential on account of the unavailability of cheap power.

Government officials seem receptive to the Growth Identification and Facilitation Framework as a means for selecting specific industries that are in line with the comparative advantage of the country and use targeted policy measures to address binding constraints to growth in each sector. The time may be ripe for a more pro-active role of the government in supporting development of industry. Also, the World Bank is adopting a less dogmatic view on the use of selective forms of protectionism to facilitate the growth of industries and may even facilitate the process.  Already the government has a flagship NIRSAL initiative which has been developed by McKinsey and Monitor and aims at supporting agricultural value chains that have the potential to catalyze industrialization . In addition the government has identified promising sectoral programs aimed at a range of sectors, such as Nollywood, auto assembly and car parts, textile, iron rods and a number of agricultural value chains.  These initiatives are compatible with the GIFF in that they target specific value chains with high growth and employment potential. The NIRSAL, in addition, targets agricultural value chains that hold the potential to catalyze industrialization.
 



*The New Structural Economics developed by Justin Lin has underscored the important role that governments can play in facilitating growth in industries that are in line with a country’s latent comparative advantage and thereby bringing about the structural transformation that is a necessary condition for sustained growth. The Growth Identification and Facilitation framework operationalizes the New Structural Economics by suggesting a methodology for selecting industries in which a country has a latent comparative advantage as well as the type of interventions that governments can undertake—in collaboration with the private sector— to promote growth in such sectors, including through industrial parks and the specific attraction of foreign direct investment in these sectors. 
 
The GIFF proposes a six-step approach to growth identification and facilitation. Three of these steps aim at the selection of sectors, including by identifying industries that have been growing fast in countries with similar factor endowment and a somewhat higher per capita GDP, as well as looking at imports that are labor-intensive, require only small investments and have limited economies of scale.  After the sectors are selected, value-chain analyses can be used to identify the binding constraints for private firms’ entry and growth in those sectors.